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India's new economic reforms should help keep the local stock market on an upward trajectory.

After two years of policy paralysis, the government, headed by Manmohan Singh, last month unveiled several changes that will open up the retail, broadcasting, and aviation sectors to foreign investment, and cut fuel subsidies to slash a burgeoning fiscal deficit and revive growth.

It's a good time to buy Indian stocks because there's still some skepticism about how long it will take for the changes to be implemented, says Ajay Kapur, Asia strategist for Deutsche Bank in Hong Kong. "We expect the market to move up another 10% to 15% on a six-to-12 months' view," he says. Deutsche Bank is forecasting corporate earnings growth of 11% for this year and 13% for next year. "That's not too shabby for an economy that's growing 6.5% annually," he says. Following a roaring start to 2012, India's benchmark Sensitive Index gave up all its gains before rallying sharply again this summer. In all, it's now up 22% year-to-date and trades at about 14 times the current fiscal year's earnings.

Kapur is particularly impressed by the performance of India's rural sector. "Land prices in India have gone up, rural employment and rural incomes are up, and rural women are working, so family incomes are going up," he says. Indeed, selling to lower-income consumers has never been a more profitable proposition. "Companies are telling us that their lowest quintile [of customer income] is doing very well with very strong growth," he says. Neelkanth Mishra, strategist for Credit Suisse in Mumbai, contends, "It's broader than just rural consumption because it includes the lower end of the urban market as well." Adds Mishra: "Unprecedented wage growth at the lower end of the spectrum is being aided by rising productivity that we are seeing with new rural roads and cellphone usage."

One good way to play India's reforms is through banks that lend to all social strata. They will benefit from an upturn in growth, stronger investment, lending to infrastructure, and improved consumer confidence. Among the top picks is ICICI Bank (ICICI.India), which is known as an innovative consumer lender. It's a favorite of Mahesh Nandurkar, India strategist for CLSA in Mumbai. "It has quality management, and its asset quality is likely to hold up better than other major banks," he says. ICICI trades at 15 times current fiscal-year earnings, or 1.9 times price-to-book.

To sustain growth, the country's central bank, Reserve Bank of India, is expected to overcome its inflation worries and cut interest rates at least couple of times over the next few months. Auto-related companies should benefit as loans become more affordable.

Credit Suisse's Mishra likes Bajaj Auto (BJAUT.India), which makes economical motorbikes—a great productivity tool for lower-income Indians, he says. Mishra expects double-digit growth over the next five years. Bajaj has also been growing exports strongly, particularly in the fast-growing African market as well as in Latin America and the Middle East. Mishra notes that despite the recent run, Bajaj shares are trading at 15 times next year's earnings. He has a target price of 2,152 rupees ($40.74), or 23% upside over next 12 months.

Mixed Bag

The Nikkei and South Korea fell for a fourth week; China and Hong Kong rose a bit.